More are beginning to align personal beliefs with their investments through exchange traded funds that adhere to socially responsible investing.
For instance, investors seeking to invest in companies that have a smaller impact on the global environment would typically follow characteristics described under sound ESG or environmental, social and governance principles, such as the SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (NYSEArca: CRBN).
LOWC and CRBN both target the MSCI ACWI Low Carbon Target Index, which tries to address carbon exposure by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, compared to the broader market. Both ETFs were created for the U.N. Joint Staff Pension Fund.
Investing in ESG principles is a good way to help manage portfolio risks. Academic research reveal that strong governance mechanisms have helped diminish default risk and lower bond yields. Barclays also recently discovered that investment-grade bonds with higher ESG scores outperformed those with low ESG scores over the past 8 years.
“Companies that focus on sustainability and impact management have historically shown the ability to create a stronger long-term enterprise,” Michael Allison, Equity Portfolio Manager at Eaton Vance, wrote in a note.
David Goodsell, executive director of the Durable Portfolio Construction Research Center at Natixis, pointed to the Volkswagen emissions scandal in 2015 as the “perfect example” why institutional investors should use ESG screens in investment policies as a way to manage risks in their portfolios, according to Asia Asset Management.
With a new generation of investors, the younger demographics are more apt to favor companies that address social and environmental responsibilities. These investors will also be prone invest in companies that follow ESG principles as a way to align investment goals with their individual values and philosophies.
“The desire to impact positive social change has resulted in investment inflows to the ESG category,” Allison added. “According to a poll conducted last year by Morgan Stanley, over 70% of all investors surveyed said they were interested in sustainable investing. In the increasingly important millennial category, that proportion was 84%.”
More recently, large pension funds have banded together to pressure industries into fundamental changes. For instance, some large state pensions have dropped coal and energy companies in favor of more environmentally friendly investments. Pension funds have also pushed for changes in boardrooms and targeted governance problems in individual companies.
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